A progressive tax is a tax that primarily takes a larger percentage out of incomes belong to the higher income groups in comparison to those for the low-income groups. The United States of America is considered an example of an economy that uses this tax system.
Understanding Progressive tax better
Benefits of progressive tax
One for the greatest benefits of progressive tax systems is that reduces tax burdens on the low-income group who are most likely going to spend their money and stimulate the economy this system leaves more money in the pockets of low income or wage earners which give them more purchasing power.
This tax regime also collects more taxes in comparison to the regressive tax system, as the tax rate tends to increase as income increases. Progressive taxes encourage more participation of people with the greatest amount of resources to fund various public projects such as building roads.
Drawbacks of progressive taxes
It is mostly considered to be discrimination against high-income earners as they are at the receiving end of it and they have to pay more taxes in comparison to other members of the society. According to the critics, the progressive tax system of US is instigating income redistribution based on myths that it is going to lead more funding for social welfare programs. Nevertheless, the percentage that the government spends on welfare programs is tiny.
Dissimilarities between Progressive and Regressive Taxes
Regressive tax tends to take a larger chunk the income from people with low income as compared to individuals who earn high incomes. An illustration of the regressive tax is sales tax as it charges the same amount of tax on both income groups, but it tends to cause more damage to the income of low-income groups.
Dissimilarities between Progressive Tax and Flat Tax
Flat tax rate system is very different for regressive and progressive as it imposes the same percentage of taxation on all income groups which means it does not matter whether you belong to the high-income group or low-income group in the tax rate would be the same.
For example, an imposition of 10% tax regardless of income is considered a flat tax. The payroll tax in the United States of America is similar to that of flat tax rate system as it takes the same taxes the same portion from all wage earners.